RBI policy: Of tumbling cauliflower prices, crumbling rate hike arguments

How many cauliflowers can destroy a forecast? Not many, as the Reserve Bank of India (RBI) would come to know when its monetary policy committee (MPC) meets next week to review its policy stance and rates.

Just a few weeks ago, a video of a farmer destroying his crop of cauliflowers went viral as it laid bare the ongoing agrarian distress. The crash in cauliflower prices, if not the farmer’s distress, will resonate at the MPC meet too, by way of its impact on headline inflation and hence the policy stance.

Falling prices of cauliflowers and other vegetables have brought down headline retail inflation to a four-month low of 4.44% in February. Vegetable prices have softened further in March and the inflation reading is expected to be benign for the month as well.

Given that, it is likely that the average consumer price index (CPI) inflation could be well below RBI’s forecast of 5.1% for the final quarter of 2017-18. It is also hoped that MPC tempers down its concerns on inflation after the recent readings. Some are even going ahead by pushing back their expectation of a rate hike to the fag-end of 2018-19 instead of the third quarter.

That food inflation has challenged the central bank’s forecast is not new. Food prices have 45% weightage in the CPI and provide considerable volatility to the retail inflation yardstick. Vegetable prices have been more volatile recently with sharp spikes and drops.

At times in the past, RBI has looked through these spikes and drops for the very reason that they tend to be short-lived.

This time around, too, it is likely to be no different. Vegetable prices in all probability would begin climbing as they seasonally do during the months of monsoon.

The need to monitor rainfall and impact on agriculture would also keep MPC from touching interest rates.

Analysts believe that the softening of food inflation could be temporary and prices are likely to move very similar to what RBI has forecast for 2018-19.

That means the central bank will have the optics and the reasons to turn hawkish towards the second half of 2018-19. Other evolving factors such as volatility induced in global markets by policy tightening of central banks in advanced economies, the commodity price trajectory and the waning impact of goods and services tax on domestic economy will also weigh.

For now, RBI would do well to leave the price of money untouched in the hope that cauliflowers will begin to fetch more money for farmers in a few months.

More importantly, distressed farmers get some relief and not through fiscal accommodation that would set another spiral of inflationary pressures.

Cauliflowers aren’t likely to upset RBI’s forecasts altogether, after all. livemint